Nov 28, 2008

World - The Venezuelan story

Benedict Mander

The grey mass of the Peter the Great , brooding at the head of a Russian flotilla in the Venezuelan port of La Guaira, served this week as an uncomfortable reminder to the US that it no longer calls the shots in its back yard.

Hugo Chávez, Venezuela’s president and long-time thorn in Washington’s side, invited the warships for joint exercises as yet another poke in the eye for the country he likes to call the “empire”. Their arrival coincided with that of Dmitry Medvedev, his Russian counterpart, for an official visit that opened on Thursday with the announcement of a nuclear co-operation accord.

Even by his standards, Mr Chávez has enjoyed a vintage year for anti-American invective. As some of Wall Street’s most celebrated institutions came crashing down, the Venezuelan president predicted that the crisis would “put an end to the evil capitalist model,” suggesting that the International Monetary Fund, as one of the main culprits, should “commit suicide”. He assured that Venezuela, thanks to his efforts to introduce “21st century socialism”, would be insulated from the upheaval elsewhere.

More recently, though, Mr Chávez has begun to change his tune. With the value of Venezuelan oil lingering below $50, he eventually conceded this week that if the fall continues the economy could experience “serious difficulties”.

Now that the former lieutenant colonel is about to complete a decade in power – he was first elected on December 6 1998 – many are asking whether falling oil prices could jeopardise what he calls his “Bolivarian revolution”. Already, it faces the threat of a resurgent centrist opposition, which staged a comeback to regain several governorships in the country’s most populous states in regional elections last Sunday.

During his first 10 years as president, oil prices rose more than tenfold – a boon for a country that now depends on oil for more than 90 per cent of its export revenues and over half of the government budget.

This windfall bankrolled massive social programmes, yielding excellent returns at the ballot box. But Mr Chávez’s growing spending commitments – designed to spread his socialist project abroad as well as at home – are beginning to look overstretched.

More worrying still for the president, say critics, is that the gap between his achievements and his tub-thumping rhetoric is becoming increasingly evident. One of the highest inflation rates in the world, sporadic shortages of basic goods, insufficient housing, crumbling infrastructure, rampant crime and endemic corruption are all undermining the president’s prospects and hitting his core constituency – the poor – the hardest.

Unquestionably, Mr Chávez has presided over a seismic shift in Venezuela’s political, social and economic landscape. Largely thanks to booming oil prices, in the past five years the Venezuelan economy has almost doubled in size, lifting about 6m of the country’s 28m people out of poverty.

In 2003, the proportion of households living in poverty peaked at 55 per cent; this had fallen to 28.5 per cent by 2007, according to Venezuela’s National Statistics Institute. Inequality has also improved, albeit less dramatically.

Yusleidy Muñoz is a beneficiary of these trends. High up on a hillside in Antimano, a slum south-west of Caracas, she gushes with enthusiasm for the president. “Chávez is our saviour: he has given us a voice, he cares about us. Before we were forgotten, abandoned,” she says, looking down over the haphazard jumble of shacks spilling precipitously down the slope.

But the empowerment of one group has meant the displacement of another. “Chávez is a tyrant who will stop at nothing to stay in power. In the process he has divided this country in two: those who love him and those who hate him. There’s no middle ground,” says Antonio Briceño, a shopkeeper in the middle-class Caracas district of Chacao, who becomes visibly agitated when talking about Venezuela’s president.

Certainly, Mr Chávez exercises considerable control over the legislative and judicial powers, as well as other institutions such as the state oil company. Yet despite this centralisation of power, the unifying theme of his presidency has been his effort to introduce forms of participation for the people, says Steve Ellner, a left-leaning political scientist at Venezuela’s University of the East. Traditional representative democracy is being replaced with “participatory” community councils, while co-operatives and worker representation on the boards of state-owned companies are aimed at encouraging greater economic participation.

“None of these programmes have been resounding successes so far,” says Mr Ellner, who admits that vast sums have been squandered. But he argues that efficiency has been sacrificed to encourage participation, and that the next five years could see consolidation.

Mr Chávez’s renowned “missions”, or social programmes, have been extremely popular among the poor but there are increasing signs that many are suffering from neglect, poor management, corruption and politicisation. Most disappointing have been attempts to encourage co-operatives, with little to show for over $1bn spent on grants.

Although subsidised food programmes reach more than 40 per cent of the population and cut budgets of poor families by 25-30 per cent, they have been hit by shortages caused by price controls. The flagship Barrio Adentro programme providing free healthcare to the poor has run into problems too: Jesús Torrealba, a social activist and government critic, reckons that as many as seven of every 10 health centres in Caracas set up for the initial phase of the scheme are now either closed or operate infrequently.

Educational programmes have reached hundreds of thousands but the quality of teaching is questioned. Meanwhile, traditional hospitals and schools stagnate from a lack of investment. “It would be ridiculous to deny the achievements of the missions, but their huge cost has yielded relatively modest results,” says Mr Torrealba.

Mr Chávez frequently insists that his revolution is just beginning. But the precipitous fall in oil prices is likely to force the government into some tough decisions.

“It’s necessary to reduce costs, to end extravagance, finish with corruption and unnecessary spending, and finish with [government] mega-salaries,” admitted Mr Chávez, who nevertheless insists that social spending will not be affected. It is more likely that spending on less politically sensitive investment projects will be cut. Already, the construction of a $4bn refinery in Nicaragua has been postponed.

But regardless of what happens to the price of oil, the economy is still in trouble, with inflation in 2008 expected to be about 30 per cent. This has caused the currency, pegged at the same rate since 2005, to become overvalued by about 50 per cent.

The problems building up in the economy are a by-product of high state spending and a tangled web of controls on prices, the exchange rate and interest rates. “This has generated huge distortions that they are going to have a very hard time fixing,” says Patrick Esteruelas, an analyst at Eurasia Group.

One of the most serious problems is the strained relations between the private sector and the government. Nationalisations, expropriations, threats and general interference have caused private investment in some sectors to all but dry up. “We live in a permanent state of fear and uncertainty,” says José Antonio Tamayo, who runs a farm outside the western city of Barquisimeto.

With domestic private sector production incapable of meeting the powerful consumer demand stimulated by state handouts and subsidies, while also disadvantaged by the overvalued currency, imports have doubled since 2003. Economists fear that sooner or later falling foreign currency receipts from oil exports will fail to match what is needed to satisfy demand for imports, pushing Venezuela into a current account deficit that will eventually become unsustainable. Even the most optimistic analysts admit that a sustained period of oil prices below $50 a barrel will be problematic.

“The government has no choice but to devalue next year, I don’t see any other way out,” says Mr Esteruelas, who explains this will help to increase revenues, diversify imports and protect the current account position. “Protestations that it won’t devalue have zero credibility – it’s not a question of if but when, and by how much.”

Indeed, the government is likely to delay such a drastic measure for as long as possible, since it would aggravate already high inflation and cause real incomes to fall, pushing many back into poverty.

Certainly, Venezuela has ample foreign currency reserves and various discretionary funds, perhaps $60bn-$70bn, to enable the government to keep its head above water for some time. But before resorting to that, the government will do its best to increase its income by lobbying for production cuts at Opec, the oil producers’ group, to buoy prices. “No one should expect some sort of economic disaster next year or even in 2010 – but in the longer term things look gloomy,” says Domingo Maza Zavala, a former director of the central bank. Indeed, without a radical change in policy, Venezuela will struggle to rebalance its economy.

Until that happens, Mr Chávez is likely to fall back on his usual strategy of railing against Washington as an external threat to his revolution. How well this works will depend to a large degree on the continued willingness of the incoming Obama administration to play its allotted part in the drama.


Weaknesses may soon be apparent

If there is one thing Hugo Chávez’s Bolivarian revolution cannot do without, it is PDVSA, the state oil company. But as oil revenues shrink, concerns are growing that the president may be overmilking his cash cow.

Not only has Mr Chávez delved deep into PDVSA’s coffers to finance popular social programmes at home, but he has also lavished its wealth on countries including Argentina, Bolivia, Cuba, Ecuador and Nicaragua to spread his influence across the region, much to Washington’s distaste.

This became possible only when Mr Chávez took control of PDVSA – by some estimates the fifth biggest oil company in the world – after a destructive industry strike in 2002-03. That led to almost all of its best managers and technical experts being fired.

Venezuela claims to have the second largest reserves in the world, at 152bn barrels, behind only Saudi Arabia. But the politicisation of the country’s oil industry has distracted it from its core business, says Luis Lander, an academic at Central University of Venezuela.

“It is said that the best business in the world is a well-managed oil company and that the second best business is a badly-managed oil company,” he says, placing PDVSA in the second category. “Due to the bonanza we have just lived through, it is difficult to detect weaknesses in PDVSA, but we are entering a period when they will probably start to become more evident.” First-half revenues rose to $72bn from $43bn, a performance unlikely to be repeated next year.

Chief among concerns are the broadening array of responsibilities – and with them costs – that are being dumped on PDVSA. Most have nothing to do with oil: they cover farming projects, distributing food, milk processing, infrastructure upgrades, urban development, shipbuilding and even training athletes. This along with a higher tax burden has diverted funds away from investment and contributed to sagging production, say analysts.

For its part, PDVSA says capital investment has almost trebled in two years, with $15.6bn (£10.1bn, €12.1bn) set aside for 2008. It insists that production increased to 3.2m barrels a day in the first half, although the International Energy Agency estimates that the group pumped only 2.3m b/d.

Either way, exports to the US are falling – and that is not only the destination of about half of PDVSA’s production but one of the few countries that pays in cash up-front. Many others, especially in the Caribbean, are given generous financing schemes. PDVSA also forfeits $10bn a year because domestic petrol is subsidised.

The help of foreign oil companies will be needed to exploit the oil-rich Orinoco Belt. “Prospects for foreign investment are not good, unless the profitability of these new projects is re-evaluated,” says Mazhar al-Shereidah, an energy expert

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